The ‘One Percent Solution’ to the Debt Crisis

Adapted from remarks presented by the author at the American Legislative Exchange Council’s Spring Task Force Summit in Pittsburgh, PA on May 6, 2016.

Hillary Clinton and Bernie Sanders propose increased taxes on the wealthy to fund ambitious federal programs. Donald Trump proposes a tax cut that would reduce revenues by $10 trillion over the next decade. Trump promises that entitlement spending will be protected, while Clinton and Sanders promise to boost those benefits significantly. It is no wonder that the presumptive presidential candidates lack credibility. The federal debt is growing at an unsustainable rate, and their policies would cause the debt to grow more rapidly. This is like coming to a railroad crossing with a train approaching, and speeding up to hit the train faster.

The Congressional Budget Office projects that over the next decade the federal debt will increase to more than 100 percent of national income, increasing the likelihood of a fiscal crisis.[1] Attempting to solve the debt crisis by increasing taxes is doomed to failure. Even if higher tax rates could increase tax revenues in the long term, a questionable assumption, the higher tax rates would be accompanied by retardation and stagnation in economic growth.

It will be impossible to solve the federal debt crisis without a significant reduction in the rate of growth in federal spending. ALEC research suggests that a one-percent reduction in the annual rate of growth in federal spending is required to bring spending and revenue into equilibrium in the long term.[2] That seems like a small price to pay for solving the debt crisis; however over the last two decades, Congress has failed to constrain the growth in federal spending by even that modest amount. The debt ceiling is routinely increased, and statutory limits on spending are ignored and evaded.

One solution to America’s debt crisis is a balanced budget amendment and related statutes to the Constitution, similar to the fiscal rules enacted in Switzerland. The Swiss Debt Brake requires that expenditures are equal to revenue in a given year adjusted for the ratio of actual income to potential income. Potential income is estimated using the trend rate of growth in income in prior years. The Swiss have used the Debt Brake to maintain expenditures and revenue in equilibrium for two decades. The Swiss Debt Brake served as a model for the new fiscal rules enacted in other European and OECD countries. Switzerland provides the best example of a country in which direct democracy in the form of initiative and referendum has played a crucial role in the design and implementation of their fiscal rules. The Swiss Debt Brake was enacted as a constitutional amendment through a referendum requiring a double majority vote of approval by citizens and cantons. The Swiss rely heavily on the initiative and referendum, with citizens voting on many tax and expenditure measures at the cantonal and federal level each year.

ALEC research shows that similar fiscal rules in the U.S. could reduce the rate of growth in federal spending about one percent per year, and maintain expenditures and revenue in long-term equilibrium.[3] The proposed fiscal rules would maintain a steady growth in federal spending over the business cycle, with surpluses during periods of economic expansion offsetting revenue shortfalls during periods of recession. As resources are shifted from the public sector to the more productive private sector, this would restore long-term trends in the rate of growth in income and employment.

These fiscal rules would require reforms in federal programs, such as those proposed by Speaker Paul Ryan.[4] That does not mean expenditures for all federal programs would be constrained by the same growth rate; priority budgeting would allow for differential growth rates in federal programs. Constraining the growth in entitlement spending will require fundamental reforms, such as those to Social Security enacted during the Reagan administration, when the payroll tax was increased and the retirement age extended. Even with fundamental reforms, expenditures for Social Security and Medicare will increase in the long term due to the demographic shock of baby boom retirements. If spending for all other federal programs is constrained, it will be easier to make the case for entitlement reform.

A priority budgeting approach will require Congress to identify waste and inefficiency in all federal programs. For example, a century ago Dwight Eisenhower warned of the dangers of a growing military and industrial complex. Admiral Bill Owens, former Vice Chairman of the Joint Chiefs of Staff, has again sounded this alarm, calling for significant cuts in defense spending. He identifies defense expenditures driven more by political considerations than by national security. New nuclear submarines for the Navy and new fighter planes for the Marine Corps are just two examples of military acquisitions that are more politically than strategically driven.[5]

Solving the debt crisis will require leadership throughout the federal government to set priorities and constrain spending. It is clear that the presumptive presidential nominees will not provide that leadership. Congress has promised to limit spending and balance the budget over the next decade but has repeatedly failed to deliver on that promise. Over the past four decades a resolution calling for a balanced budget amendment to the Constitution has been introduced numerous times, but Congress has failed to reach the two-thirds vote required to place the measure on the ballot for ratification.

If elected officials fail to balance the budget, citizens are left with one recourse – an Article V Amendment Convention to propose a balanced budget amendment to the U.S. Constitution. Polls conducted by the Balanced Budget Amendment Task Force reveal that 70 to 80 percent of citizens support it. Twenty-eight states have now passed a resolution calling for such an Article V Amendment convention. Over the next year there is a high probability that another six states will pass this resolution, to reach the two-thirds required for Congress to call the convention. This will allow citizens, rather than their elected representatives, to vote on fiscal rules requiring the federal government to maintain expenditures and revenue in long term equilibrium.

Genuine accountability to hardworking taxpayers results when state and local legislators work with members of the community to determine a plan of action that is right for each individual state, city or town. Real solutions to America’s challenges can be found in the states – America’s fifty laboratories of democracy …